Today’s Blog – Monday 24th April 2017

Our ongoing doubts about Saudi Arabia achieving a successful float of part of Aramco at its preferred US$2T valuation received a bit of a jolt last week. This was due to news that China was assembling a heavy hitting consortium to take a key stake in the floated stock – with parties including PetroChina, Sinopec, large banks, etc, being in the group. A Hong Kong listing would be sought as a quid pro quo.

An investment of this nature would likely be strategic rather than value-based in its approach. It could therefore support a much higher share price than would otherwise be the case. From our personal investing point of view, the one thing that would be worse than putting money into a company controlled by a medieval government is one controlled by a medieval government in partnership with the current Communist dynasty of the Middle Kingdom. We don’t think caring for minority shareholders would somehow be the highest item on their priority list.

If this concept gains further traction it will be interesting to see if the American Government has any concerns about the Chinese messing in what has been a sphere of influence since the famous meeting between Roosevelt and Ibn Saud in 1945.

Saudi oil is more important to China than the US these days – but still there would likely be some concerns in Washington about Beijing growing its influence in Riyadh.

Commodity prices

Crude prices continued to fall at the end of last week (and were down 7% for the week overall). Brent closed at US$51.96 and WTI fell below US$50 again to US$49.62.

The “numbers” news in the week was not that bad – but still somewhat negative – and the overall market vibe was concern about rising US production. This factor got another boost on Friday with the weekly BHI rig count having a rise in oil rigs of 5 (and gas rigs were also up by 5).

Henry Hub also had a poor week – down 4% – closing at US$3.10.

LNG and international gas

Some very large new gas numbers were reported in the press late last week following a media release by the United States Geological Survey. The USGS has just revised its estimateds of the resource potential of the Haynesville and Bossier formations on the Gulf of Mexico shore-line – coming up with a massive figure of > 300 Tcf of gas.

Many media outlets reported this figure as a gas “discovery”. Closer inspection of the USGS’s actual release revealed that this is in fact an “undiscovered technically recoverable resource”.

So the rest of the gas supply world dosen’t need to quake in its boots just yet.

Governments

The ACCC has gleefully taken up the baton passed to it by the Federal Government last week to more closely look at Australia’s gas supply industry. Based on some of their early comments, the pipeline industry could be in the cross-hairs more than the up-streamers. That seems only fair when one looks at the prima facie evidence of who is earning economic rents and who isn’t – e.g. the comparative share price performance of APA Group versus that of Santos (STO) and Origin Energy (ORG).

Company news – STO

The Australian Financial Review (AFR) had yet another detailed article today analysing the woes of the STO led GLNG joint venture. It appears that the pages of the press are a tool to assist the JV parties in thrashing out their disagreements. Selective leaks seem the order of the day – and one well known feature of STO’s current structural weaknesses was explicitly emphasised.

This was its 750 PJ contract to sell gas from the Cooper Basin to GLNG at ~US$3. The simple arithmetic behind multiplying the first number by the delta between the second number and current Australian gas prices of say A$9-10 (and some much higher figures are being quoted) gives quite a few billion dollars. So some incentives there to see whether this contract can be broken.

To date the AFR is not being used by STO’s unhappy Chinese strategic shareholder – if it was, the position of the long-standing members of the company’s Board would surely come under more scrutiny. One can readily imagine this would be the case if this investor was American.

Quote of the day

BG Group’s ex-COO Martin Houston – a co-founder of US LNG company Tellurian with Charif Souki – gave an interesting interview recently, with many quotes that will resonate with those of our readers who are or have been inside big E&P companies in recent years. An example:

“So you would take a 25-year-old engineer and say you are in charge of the standard of door handles. My God he will make sure you have the best door handles. And if you want to build something with different door handles, no dice. Because he owns that standard. Aluminium? Forget it, only gold. Pure gold. 24K by the way. Not the cheap stuff.”